Financial wells are drying up

Schenectady, other cities drain reserves to bridge shortfalls

By Jimmy Vielkind and Lauren Stanforth

Published 11:30 pm, Wednesday, August 22, 2012

Schenectady could become the next hot spot in the municipal finance crisis sweeping across upstate New York.

The Electric City's rainy day fund is down to about $75,000 — a tiny piece of its $79.3 million annual spending. City officials have raided reserve funds to the tune of $15 million in the last four years to cover shortfalls after a once-lucrative deal to collect on delinquent property taxes dried up in the recession.

The city is forming a new budget for 2013 as its restricted reserves, funds not typically touched, are only $4 million. Concerned, auditors from the state comptroller's office arrived in July to assess the situation.

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"We became aware of possible fiscal stress issues in Schenectady and thought the city could benefit from an audit," Comptroller Tom DiNapoli said in a statement. "By alerting local officials to impending problems sooner, we can give them sufficient time to take corrective action before state intervention might be needed."

Schenectady Finance Commissioner Ismat Alam promised there would be "no sacred cows" safe from elimination during this year's budget cycle, but Mayor Gary McCarthy said the situation is far from dire.

"We're not in as bad a shape as some people would say," said McCarthy, the former City Council president who won last November's election in a nail biter with former Union College President Roger Hull. "But we're an urban city in the state of New York, and we're not in good shape."

While it has unique issues, Schenectady is hardly alone among upstate cities grappling with their annual budgets. Years of population decline and the erosion of a once-robust manufacturing base have strained municipal finance, but a drop in revenues and a spike in pension contributions that followed the 2008 stock market crash made matters worse. While the Capital Region's status as a center of government and nanotechnology has helped insulate it from upstate economic woes, it is not immune.

Many localities limped from year to year, using one-time shots of revenue to keep its accounts balanced and avoid major service cuts or tax hikes that could render them unlivable.

In a report this month, DiNapoli's office found that "the liquidity of local governments is deteriorating" as a result: almost 300 municipalities ended 2010 or 2011 in a deficit, and 27 completely drained their reserves.

The city of Albany joined Syracuse and Rochester in using one-time payments of state aid to close its budget. Albany got a $7.8 million "spin-up" — or advance — on future money it is owed by the state in lieu of taxes on the Empire State Plaza and still expects to tap roughly $5.6 million from its reserves to balance the books this year.

The 2012 spending plan came in under the state's new 2 percent cap on property tax increases, laid off no workers and even included raises for some non-union city workers who had gone three years without them.

Long term, Albany officials plan to continue to lobby for what they say would be a more equitable share of state aid to the city — a share that factors in the costs to Albany of hosting state government. Mayor Jerry Jennings also continues to fight for a separate set of payments in lieu of taxes on the 330-acre tax-exempt Harriman State Office Campus.

Most municipal leaders are not playing Chicken Little and describe plans to make things better. On its own, dipping into reserve funds is not a problem unless a county, city or village gets close to a constitutional tax limit — the total amount raised by property taxes can't be more than 2 percent of the total assessed value.

DiNapoli's auditors monitor local government financial data and look at how close a municipality comes to this tax ceiling as well as the ratio of cash on hand to the amount of short-term liabilities.

Over 100 municipalities didn't have enough cash to cover three-fourths of their bills, according to DiNapoli's report. That includes Watervliet and Rensselaer, which was the subject of a series of audits in recent years that found lax spending controls.

Rensselaer has about $1.4 million in the bank — roughly 10 percent of its annual budget — and the budget that began Aug. 1 did not dip into the fund balance. It does, however, rely on selling foreclosed properties and a projected increase in sales tax.

"We've got our finances in line," said Mayor Dan Dwyer. "It was a hard go for the first four years to stabilize it, but we were very successful."

Watervliet dipped into its fund balance for a projected $290,000. Mayor Mike Manning said his plan is to develop a hydroelectric facility in Oneida County to provide a long-term revenue source and eat into the city's $1.1 million in reserves until it can be brought online.

"That's a big part of us being self-sufficient in the future. Our main revenue is the property tax, and we can't expect that to keep going up," he said. "Our formula is working so far — appropriate it, take the burden off the taxpayer and put it on us to cut costs and run things more efficiently — and bring things in line."

Schenectady hopes to sell more homes in the city, working with KeyBank. It was already in the red by about $5 million at the close of 2011, and McCarthy, whose proposed budget will be released Oct. 1, won't reveal how he'll make the numbers work.

Auditors reported in May that Schenectady appears financially solvent this year. But if it gets approval from the comptroller's office to take money from restricted reserves and continues to borrow money, it will go broke in the next couple of years, said its auditors, Cuscak & Co. of Latham.

City Council member Vincent Riggi, who was the only Hull-backed candidate to succeed in last year's election, said he believes Schenectady is on the path to being taken over by a state control board.

Riggi said he doesn't know how McCarthy will come up with a balanced budget for next year, adding, "I don't know what rabbits he will pull out of the hat."